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In the previous installment, we covered techniques as varied as anchoring, hyperbolic discounting, price perceptions, three options and false consensus. Each is an example of behavioral economics, or what some psychologists now term "neuromarketing" to cover the intersection of the brain and commercial forces which seek to persuade it. Let's continue our survey of these powerfully subtle effects to see how and whether you might employ them in your business.

Loss aversion

Like a dog with a bone, we don’t like to lose things we’ve already won. Such jealousy is so bad that a rule of thumb states the satisfaction lost from a $50 loss is equal to the satisfaction gained from a $100 increase. Most marketers employ this concept by hooking customers with a free trial. After that comes the buy-in, the renewal, the up-sell. For our purposes, it means re-framing our messages around what might be lost (“Don’t miss out on special savings”) or (“Don’t lose what you’ve spent a lifetime accumulating”) versus what might be gained (“LTCI gives you freedom of choice”).

Choice support bias

We want to know that our decisions are good ones, so we tend to rationalize them after the fact. Our minds are so good at this that over time, we come to believe we’re expert decision makers. In a feedback loop ("I make good decisions, therefore I'm a good decision-maker"), we tend to reinforce our established choices.

You've no doubt witnessed this with disciples of Apple who relish libeling Microsoft — and vice-versa — and become more devout as time wears on.Because of choice support bias, it’s very important that your client make an early decision in your favor. If so, it’s likely that she will continue to believe in you repeatedly and over time. I expect this is one of the underlying reasons why persistency is so high in LTC, but I also suspect we are not doing all that we can to obtain testimonials from our many satisfied policyholders.

Decoy pricing

It can be awkward or simply impossible to come straight out and ask someone, “How much will you pay?” For one thing, people tend to spend hypothetical dollars more freely than their own (e.g., when asked during surveys), and second, people don’t really know what things are worth.

The concept of decoy pricing comes to us from Dan Ariely's book, "Predictably Irrational," in which he describes a choice of subscription offers from The Economist:
1. Online subscription: $59
2. Print subscription: $125
3. Print + online subscription: $125
When Dr. Ariely conducted an experiment with 100 of his MIT students, 16 chose option one and 84 chose option three. No one chose option two. So, why even have the decoy, right? Dr. Ariely removed it, and tried his experiment again.
1. Online subscription: $59
2. Print + online subscription: $125
This time, he asked a new set of 100 students. Sixty-eight chose option one and 32 chose option two. It turns out the second option wasn’t useless, but served a valuable decision-making function for people. It can be difficult weighing options, but if two are similar in some way (e.g., price), great clarity can result.
When crafting options for your clients, create a decoy to help mitigate the frustration of the decision-making process.

Charm numbers

Why do we still use so-called “charm prices” like $49 instead of $50, or $29.99 instead of $30? Because they increase sales as much as 24 percent, according to one study.

In another experiment, an item priced at $39 outsold an identical version priced $5 less, at $34. The most powerful use of the number 9 is when coupled with the original price: “Regularly $48, now $39 on sale”. It also turns out that the physical size of the font is related to price perception; so when we see small type, we perceive small price. When we see large, bold type, we perceive larger price.

Be mindful of this when creating your product illustrations: Premium should be small, benefit should be large. Some illustration software permits “budget-point” pricing, such that producers can enter the premium and work backwards. Would it be possible to craft a premium ending in 9 for persuasive effect? Coupling such a premium with the original price (“Before the application of couples discount and good health discount…”) might maximize the impact.

Caveat

One of my favorite writing programs is called OmmWriter. Apart from developing a crisp, transcendent utility, the folks at OmmWriter have also instituted “pay as you wish” pricing. Common sense would immediately suggest such uncertainty would never survive in insurance. In fact, in other experiments in pay-as-you-wish (such as a short-lived experiment by Panera Breads), some cities did respectably well, while others struggled.

Furthermore, ommwriter recommends new customers pay any amount ending in “1” (such as $4.11, $5.11, or $11) solely because certain cultures consider such monetary gifts auspicious. Does this not fly in the face of our other research promoting charm numbers ending in 9?

The takeaway from both examples is this: What works in one industry may not work in yours. That’s the allure and the risk of behavioral economics. It’s a nascent science, one we still apply brutishly.

It should also go without saying that most of these strategies were discovered in the experimental universe of flexible retail pricing. In our universe, insurance rates are calculated by actuaries, filed with the states, and are legally unmovable by producers. Still, within these boundaries, we do design benefit plans in concert with our clients and make recommendations based on suitability. It is into this door that a marketing foot can be wedged.

About the Author

Since the early 1970's, the Formans have been pioneers in the field of long-term care insurance, helping to design some of the earliest plans, and testifying before Congress. Today, Stephen Forman and his 2 brothers carry on the family tradition of leading the industry as vocal proponents and tho... More